Ross Delahunty v Victorian Legal Services Board
[2017] VSCA 327
•13 November 2017
SUPREME COURT OF VICTORIA
COURT OF APPEAL
S APCI 2017 0002
| ROSS DELAHUNTY | Applicant |
| v | |
| VICTORIAN LEGAL SERVICES BOARD | Respondent |
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| JUDGES: | FERGUSON CJ, WHELAN and COGHLAN JJA |
| WHERE HELD: | MELBOURNE |
| DATE OF HEARING: | 1 September 2017 |
| DATE OF JUDGMENT: | 13 November 2017 |
| MEDIUM NEUTRAL CITATION: | [2017] VSCA 327 |
| JUDGMENT APPEALED FROM: | [2016] VCC 1829 (Macnamara J) |
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STATUTES – Statutory Interpretation – Fidelity Fund paid claim caused by solicitor’s alleged default – Board’s power of subrogation against solicitor – Whether proof of dishonesty required – Unnecessary to prove dishonesty – Payment out of Fidelity Fund triggers right of subrogation – Legal Services Board v Werden [2011] VSC 74, Law Society of NSW v Bruce (1996) 40 NSWLR 77 – Legal Profession Act 2004.
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| APPEARANCES: | Counsel | Solicitors |
| For the Applicant | Mr D Aghion | Mr M Delahunty |
For the Respondent | Mr E Moran with Ms L Kirwan | Law Institute of Victoria |
FERGUSON CJ
WHELAN JA
COGHLAN JA:
Ross Vincent Delahunty was a sole legal practitioner who carried on his practice under the name ‘Legal Rite.’ Mr Delahunty operated a trust account as part of his practice. On 14 September 2011, a receiver was appointed to his practice.
On 29 August 2012, a claim for $126,548.30 was made by the executors of the estate of a Ms Cook on the Legal Practitioners Fidelity Fund (‘the Fidelity Fund’). The Fidelity Fund was maintained by the Legal Services Board (now the Victorian Legal Services Board) (‘the Board’) under the Legal Profession Act 2004 (‘2004 Act’).[1] The claim concerned trust account transactions related to the claimant’s affairs including payments made to Mr Delahunty purportedly for legal costs for the provision of legal services by Legal Rite.
[1]New legislation now operates to regulate the legal profession but, due to transitional provisions, the old legislation continues to apply to the current proceeding, albeit that the Board is now called the Victorian Legal Services Board.
On 24 October 2013, the Board allowed the claim. On 14 November 2013, the Board paid the claimant the amount claimed.
Having paid the claim, the Board issued a proceeding in this Court alleging that under the 2004 Act it is subrogated to the rights and remedies of the claimant against Mr Delahunty. The Board seeks an order that Mr Delahunty pay to it the sum of $126,548.30 or make restitution in that amount. The Board does not make any allegation of dishonesty against Mr Delahunty.
Mr Delahunty says that before the Board has any rights of subrogation, it would need to allege and prove that there was some element of dishonesty on his part. Consequently, a preliminary question was ordered to be determined as to whether the Board needs to establish dishonesty. A judge in the County Court held that that was not necessary. Mr Delahunty now seeks leave to appeal from that decision.
For the reasons which follow, we would grant leave to appeal. We would dismiss the appeal.
The legislation
Part 3.6 of the 2004 Act dealt with fidelity cover. The purpose of that part was to compensate clients for loss arising out of defaults by law practices arising from acts or omissions of associates and defaults by approved clerks.[2] Relevantly, ‘default’ was defined in s 3.6.2 (in the case of a law practice) to mean:
(i)a failure of the practice to pay or deliver trust money or trust property that was received by the practice in the course of legal practice by the practice, where the failure arises from or is constituted by an act or omission of an associate that involves dishonesty; or
(ii)a fraudulent dealing with trust property that was received by the practice in the course of legal practice by the practice, where the fraudulent dealing arises from or is constituted by an act or omission of an associate that involves dishonesty;
[2]Section 3.6.1.
Division 3 of Part 3.6 of the 2004 Act concerned claims about defaults. Section 3.6.7(1) provided:
A person who suffers pecuniary loss because of a default … may make a claim against the Fidelity Fund to the Board about the default.
‘Pecuniary loss, in relation to default’ was defined to mean:
(a)the amount of trust money, or the value of trust property, that is not paid or delivered; or
(b)the amount of money that a person loses or is deprived of, or the loss of value of trust property;[3]
[3]Section 3.6.2.
Division 4 of Part 3.6 dealt with the determination of claims. So far as relevant, s 3.6.14 provided:
(1)The Board may determine a claim by wholly or partly allowing or disallowing it, or otherwise settling it.
(2)The Board may disallow a claim to the extent that the claim does not relate to a default for which the Fidelity Fund is liable.
…
(6)If satisfied that the act or omission giving rise to a claim actually occurred, the Board may allow the claim despite the fact that—
(a)the person who committed the act or omission has not been charged with, or found guilty of, an offence in respect of the default; or
(b)the evidence on which the Board is acting would not be sufficient to establish the guilt of that person in a criminal proceeding in respect of the default.
Section 3.6.19 dealt with subrogation and provided:
(1)On payment of a claim from the Fidelity Fund, the Board is subrogated to the rights and remedies of the claimant against any person in relation to the default to which the claim relates.
(2)Without limiting subsection (1), that subsection extends to a right or remedy against—
(a)the associate or person in respect of whom the claim is made; or
(b)the person authorised to administer the estate of the associate or person in respect of whom the claim is made and who is deceased or an insolvent under administration.
(3)Subsection (1) does not apply to a right or remedy against an associate if, had the associate or person been a claimant in respect of the default, the claim would not be disallowed on any of the grounds set out in section 3.6.14(3).
(4)The Board may exercise its rights and remedies under this section in its own name or in the name of the claimant.
(5)If the Board brings proceedings under this section in the name of the claimant, it must indemnify the claimant against any costs awarded against the claimant in the proceedings.
(6)The Board may exercise its rights and remedies under this section even though any limitation periods under this Part have expired.
(7)The Board must pay into the Fidelity Fund any money recovered in exercising its rights and remedies under this section.
Legal Services Board v Werden
A predecessor version of the legislation was considered by Beach J (as his Honour then was) in Legal Services Board v Werden.[4]In that case, a solicitor had pleaded guilty to various counts of theft, obtaining a financial advantage by deception and having a deficiency in his trust account as a solicitor. The Legal Practice Board paid various amounts out of the Fidelity Fund in settlement of claims arising from the defalcations. The Legal Services Board (which was the successor of the Legal Practice Board) made allegations of breach of trust against the solicitor and sought compensation.[5] The trial proceeded on the basis of agreed facts, including that there had been claims made on the Fidelity Fund in respect of the defalcations with those claims having been paid out by the Legal Practice Board. One of the arguments that the solicitor relied upon was that the claims should not have been paid because s 208(3)(b)(i) of the legislation (in its then current form) provided that a claim did not lie against the Fidelity Fund in respect of a defalcation of money given to a practitioner for the purpose of investment or re-investment. He alleged that the payments made to him fell within this exclusion. Section 211(3) provided that the Legal Practice Board ‘must disallow a claim against the Fidelity Fund if the claim does not lie under s 208.’ So far as relevant, s 217 provided:
(1)Subject to section 262, on payment out of the Fidelity Fund of any money in satisfaction of a claim for compensation under this Division, the Board is subrogated to the extent of that payment to the rights and remedies of the claimant against any person in relation to the defalcation.
(2)The Board may exercise its rights and remedies under this section in its own name or in the name of the claimant and must pay into the Fidelity Fund any money paid to it as a result of it doing so.
(3)If the Board brings a proceeding under this section in the name of a claimant, the Board must indemnify the claimant against any costs awarded against the claimant in the proceeding.
[4][2011] VSC 74 (‘Werden’).
[5]A separate claim for compensation based on the Sentencing Act 1991 was also made.
Beach J noted that under the legislation the Legal Practice Board had power to settle claims against the Fidelity Fund. His Honour observed that this must include a power to settle claims where it was arguable that a claim did not lie against the Fidelity Fund, and that this did not make a settlement invalid or of no effect.[6] Beach J then held that:
the right of subrogation given by s 217 is not predicated upon the Legal Practice Board having to negative every exception contained in s 208. Rather, the right is predicated upon payment out of the Fidelity Fund of any money in satisfaction of a claim made under Division 2 of Part 7 of the Legal Practice Act. That is, what the plaintiff must establish in order to succeed is not the negative of any exception in s 208, but rather, the fact that a payment or payments were made out of the Fidelity Fund in satisfaction of a claim for compensation under Division 2 of Part 7 of the Legal Practice Act. The question of what right is conferred by s 217 on the Legal Practice Board, is answered by construing s 217(1). Specifically, construing s 217(1), the Legal Practice Board becomes subrogated, to the extent of a payment, upon payment out of the Fidelity Fund of that amount in satisfaction of a claim for compensation under Division 2 of Part 7.[7]
[6]Werden [2011] VSC 74 [80].
[7]Ibid [81] (citations omitted).
His Honour found further support for his conclusion in the terms of s 217(2). Section 217(2) permitted the Legal Practice Board to exercise the rights and remedies in s 217 either in its own name or in the name of the claimant. Beach J stated:
If the Legal Practice Board… exercised the right of subrogation in the name of the claimant, there could be no issue about the liability to make a payment out of the Fidelity Fund. If, upon litigating the issue, it might have been determined that the claim should not have been accepted, this would not have provided a defence to a proceeding brought in the name of the claimant. It is not good law to say that, in order for the plaintiff to succeed in a proceeding brought in a claimant’s name, the plaintiff must show that if the Legal Practice Board had been sued by the claimant, the claimant must have succeeded in that action. That being so, it would be, at least, a curious construction of s 217 if the right to relief of the Legal Practice Board (and now the plaintiff) might be different dependent upon whether the right of subrogation is exercised on the one hand in the name of the plaintiff or, on the other hand, in the name of the claimant.[8]
[8]Ibid [82] (citations omitted).
The preliminary question and the judge’s determination of it
As mentioned, a preliminary question was formulated for determination. The question was:
In this proceeding where the Board:
(a) alleges the claimants [viz the executors of Ms Cook’s Estate] (as defined in paragraph 4 of the Statement of Claim) made a claim on the Fidelity Fund in respect of pecuniary loss arising from the acts or omissions of the defendant (‘the claim’); and
(b) asserts that it has been subrogated under s 3.6.19(1) of the Legal Profession Act 2004 (Vic) (‘the Act’) to the rights and remedies of the claimants against any person in relation to the default to which the claim relates;
does the Board need to establish that any alleged default to which the claim relates arose from or was constituted by an act [or] omission that involved dishonesty (as referred to in the definition of ‘default’ in s 3.6.2 of the Act)?
The judge determined that the answer to this question was ‘no’.[9] The judge rejected Mr Delahunty’s contention ‘that there must be a symmetry between the proofs necessary, on the one hand, to establish a claim for payment out of the Fidelity Fund and, on the other hand, to make good a claim against the practitioner involved under the Board’s powers of subrogation.’[10] The judge reasoned:
Whilst an element of dishonesty might be essential to the success of the claim against the Fund, the claim might go much wider than that and one may ask, why should the Board not be able to avail of those wider rights which do not involve dishonesty where the generality of the subrogation provision would appear to allow for that and there is no express exclusion of such reliance?[11]
[9]Victorian Legal Services Board v Delahunty [2016] VCC 1829 (‘Reasons’) [76].
[10]Ibid [66].
[11]Ibid [67].
The judge concluded that s 3.6.14(2), which permitted the Board to disallow a claim that ‘may’ not relate to a default for which the Fidelity Fund was liable, gave the Board a discretion to allow a claim even if it did not relate to a default.[12] He also observed, relying upon Werden, that the power to settle a claim under s 3.6.14 carried with it ‘a power to make a payment where it is arguable that the claim does not arise because of a default’.[13] For these reasons the judge determined that it was not necessary for the Board to establish that the alleged default involved dishonesty and that the answer to the question posited was ‘no’.[14]
[12]Ibid [72].
[13]Ibid [74].
[14]Ibid [76].
The parties’ submissions
There are two proposed grounds of appeal: (1) the judge erred in the construction of s 3.6.19 of the 2004 Act and, consequently, erred in answering the preliminary question ‘no’; and (2) the judge should have found that the proper construction of s 3.6.19 of the 2004 Act required the Board, in this proceeding, to establish that any alleged default to which the claim relates arose from or was constituted by an act or omission that involved dishonesty such that the judge should have answered the preliminary question ‘yes’.
Mr Delahunty’s submission is that the Fidelity Fund was established under the 2004 Act to meet claims for pecuniary loss arising from defaults (as defined). That is, to meet claims which arise from dishonest conduct. He contends that, critically, the subrogation provision (s 3.6.19(1)), read within the context of the 2004 Act, makes it clear that subrogation does not operate at large. In his submission, it operates:
(a)where a person has received a payment from the Fidelity Fund, which is conditioned upon the existence of pecuniary loss on the part of the claimant arising from a default;[15] and
(b)only in respect of the rights and remedies of the claimant against any person in relation to the default to which the claim relates.[16]
[15]2004 Act s 3.6.7(1) (emphasis added).
[16]2004 Act s 3.6.19(1) (emphasis added).
Mr Delahunty submits that the reference to ‘default’ is operative and qualifies the Board’s right to be subrogated. If there is no ‘default’ there can be no subrogation. A ‘default’ as defined in s 3.6.2 must involve dishonesty. It is therefore, he says, incumbent on the Board to establish (among other things) a pecuniary loss arising from dishonesty. Mr Delahunty contends that this is consistent with the purpose of the provisions being ‘to compensate clients for loss arising out of defaults by law practices arising from acts or omissions of associates and defaults by approved clerks.’[17]
[17]2004 Act s 3.6.1.
Mr Delahunty contends that the judge failed to give effect to all of the words in s 3.6.19(1) with the consequence that on the judge’s interpretation it would read:
On payment of a claim from the Fidelity Fund, the Board is subrogated to the rights and remedies of the claimant
against any person in relation to the default to which the claim relates.
Mr Delahunty submits that, on a plain reading, what are said to be the notionally struck out words create a nexus between the conduct alleged against a relevant legal practitioner and the extent of any subrogated rights. In his submission, unless and until the existence of a default is established (which requires it to be pleaded first), it is not possible to determine whether the rights which the Board seeks to assert relate to a relevant ‘default’. In other words, he says that the relationship between the two things can only be determined if one first determines the existence of each thing. In this way he says that the judge wrongly rejected his argument that the 2004 Act creates a symmetry between a claim made on the fund and the rights and remedies to which the Board is subrogated on payment of a claim. He contends that once the Board pays a claim in respect of dishonest conduct, it is entitled to be subrogated to all causes of action that the claimant has, including those that do not include dishonesty as an element. But, he says, the reverse does not apply. Where there is no ‘default’ because there is no dishonesty, no rights are subrogated.
Mr Delahunty relied upon Law Society of New South Wales v Bruce.[18]In that case, Giles CJ Comm D considered a right of subrogation that the New South Wales Law Society had under s 90A(1) of the Legal Profession Act 1987 (NSW). That section provided:
On payment of a successful claim against the Fidelity Fund, the Law Society is subrogated to the rights and remedies of the claimant against any person in relation to the failure to account or dishonest default.
[18](1996) 40 NSWLR 77 (‘Bruce’).
At issue was whether the Law Society, having paid claims brought by investors in respect of a solicitor’s failure to account to them, could recover damages against a stockbroking firm and its investment adviser. Some of the investors had not dealt directly with the solicitor but rather with the stockbroking firm and its adviser. Giles CJ Comm D stated:
The control upon the width of ‘any person’, and upon the extent of the
rights and remedies to which the Law Society is subrogated, is that the rights
and remedies against the person must be ‘in relation to the failure to account
or dishonest default’…. In examining the control…, the failure to account or dishonest default must be identified, the rights and remedies against a person must be identified, and it must be asked whether the latter are ‘in relation to’ the former.[19]
[19]Ibid 84.
Mr Delahunty submits that the reasoning of Giles CJ Comm D should be applied here. He contends that the Board has failed to identify the ‘default’ which must (by reason of its definition) involve dishonesty.
Mr Delahunty seeks to distinguish Werden[20] on the basis that in that case there was a defalcation which satisfied the condition for subrogation under s 217 of the legislation and that the judgment must be read in that context. Consequently, he says that Werden is of little assistance in the present case.
[20][2011] VSC 74.
The Board contends that the plain words of s 3.6.19(1) (which gives rise to rights of subrogation) do not require it, whether bringing proceedings in its own name or in the name of a claimant on the Fidelity Fund,[21] and whether against a defendant who may be an associate or another person liable for the loss suffered by the claimant,[22] to establish that the associate acted dishonestly. The Board contends that Mr Delahunty’s submission requires the Court to read words into s 3.6.19. In its submission, if Parliament had intended the construction contended for by Mr Delahunty, it would have expressly provided that, after payment from the Fidelity Fund, in any proceeding brought in exercise of the subrogated rights and remedies the plaintiff must prove there had been a default. On the contrary, it says that s 3.6.19 is not prescriptive as to the matters which must be established in that way. It provides a means by which the Fidelity Fund’s discretionary indemnification can be alleviated and the Fund replenished. In light of that contended for purpose, the Board argues that its legal and evidentiary burden should not be greater than a claimant’s burden had they chosen to sue the associate instead of claiming on the Fidelity Fund. Were it otherwise, so the argument runs, s 3.6.19 would be creating a hurdle to the Fund being replenished that would make a payment out of it unlikely in respect of an act or omission of an associate unless the Board was satisfied that a court would be likely to find that the associate acted dishonestly. This would have to be established on the Briginshaw[23] standard. This, the Board says, would lessen the protection of consumers of legal services. Relying on Werden,[24] the Board submits that it need only plead and prove a claimant’s cause of action in the same way and to the same standard as the claimant would have had to prove its case against the associate.
[21]2004 Act s 3.6.19(4).
[22]2004 Act s 3.6.19(1) permits proceedings to be brought against ‘any person’. For instance, the Board says, if the Fidelity Fund paid a claim in respect of a default caused by one dishonest partner of a law firm, the claimant may also have rights and remedies against the ‘innocent’ partners.
[23]Briginshaw v Briginshaw (1938) 60 CLR 336.
[24][2011] VSC 74. The Board also relied on Registrar-General v Gill (1994) 17 BPR 33,709.
The Board submits that where it commences proceedings in its own name pursuant to the subrogated rights and remedies granted under s 3.6.19(1), it needs to only prove that the claimant suffered a pecuniary loss as a result of the pleaded cause of action (that is, that the claimant would have had a remedy), that the pecuniary loss was the subject of the claim made against the Fidelity Fund (that is, some connection or association between the subject matter of the proceeding and the subject matter of the claim), and that in satisfaction of that claim a payment was made out of the Fidelity Fund.
Analysis
In our opinion, when one reads s 3.6.19(1) in context, the subrogation right is triggered when a claim is paid by the Board from the Fidelity Fund. Contrary to the submission of Mr Delahunty, the subrogation provision is not pre-conditioned on there being a default. Rather, its operation begins upon a payment being made out of the Fidelity Fund. The payment must be connected to a claim on the Fidelity Fund which the Board has seen fit to determine or settle in favour of the claimant. In this regard, it is significant that the expression ‘in relation to the default to which the claim relates’ in s 3.6.19(1) is cast in broad terms. The expression does not limit the right of subrogation to circumstances where there has been a default; it identifies the subject matter of the right of subrogation.
Bruce[25] is distinguishable. Missing from the legislative provision in that case is the phrase ‘to which the claim relates’ that is present in s 3.6.19(1). Those words are part of the composite expression to which we have referred in the preceding paragraph. The legislative language considered by Giles CJ Comm D was significantly different. There, the rights subrogated were the rights ‘in relation to the …dishonest default’. Here, the rights subrogated are rights ‘in relation to the default to which the claim relates’. The concluding words ‘to which the claim relates’ influence the meaning to be given to the preceding words. The whole of the expression must be considered, in the context of both the section as a whole and other relevant provisions, and bearing in mind the purpose of the legislation as disclosed by the legislative text. In that context, the correct construction, in our view, is that the subrogated rights must be connected to a claim which is related to a default but are not pre-conditioned on proof of a default.
[25](1996) 40 NSWLR 77.
The Board’s power to settle claims (s 3.6.14(1)) is a strong indicator that it is not intended that the Board may only recoup the amount paid from the Fidelity Fund where dishonesty can be proved. The settlement power only has work to do where there is doubt about the prospects of the claim. Once a settlement is agreed the claimant is compensated and the Board may then stand in the shoes of the claimant and pursue the legal practitioner. If it must prove dishonesty, the claimant could receive compensation, and the Fidelity Fund would be depleted to the extent of that payment, but the practitioner would not have to meet the claim, unless dishonesty were proved, even if the claimant had a valid direct claim against them for the sum paid to the claimant by the Board.
The interpretation for which Mr Delahunty contends would lead to a most unlikely outcome — that is, that the Board, acting diligently and in compliance with its statutory duties, might settle a claim, pay out money from the Fidelity Fund, and then find that it could not recover from a legal practitioner liable to the claimant for the amount paid out, because the Board was not able to establish that dishonesty was involved.
That it is the payment out of the Fidelity Fund that triggers the right of subrogation is made clear by the existence of the Board’s power to bring proceedings in the name of the claimant. Beach J observed in Werden[26] that in those circumstances there could be no issue about whether the payment out of the Fidelity Fund to the claimant was justified or not. Likewise, in our view, if the Board brought proceedings in the name of the claimant, the only issue would be whether the practitioner was liable to the claimant. There is no logical basis on which a different result should be reached dependent upon whether the Board brings the proceeding in its own name or in the name of the claimant.
[26][2011] VSC 74.
Conclusion
In exercising rights of subrogation under the 2004 Act, it is unnecessary for the Board to allege and prove as an element of the claim against Mr Delahunty any dishonesty on his part.
The application for leave to appeal should be granted as the matter was arguable. The appeal should be dismissed.
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